Baltic Sea Report – Still business opportunities to be found in the region

19-10-2011

The Gross Domestic Product (GDP) of the Baltic Sea region is expected to grow by 3.6 per cent this year, but a slowing global business cycle weakens the recovery. Growth rates of 2.6 per cent in 2012 and 2.9 per cent in 2013 are expected. Despite gearing down, the outlook is better than in other parts of Europe, according to Swedbank’s Economic Research Department.

Swedbank’s Economic Research Department’s structural index – The Baltic Sea Index – indicates that the region’s business climate and competitiveness remain strong again this year (7 out of 10). Education ranks high, but there is room for improvement, not least in the areas of entrepreneurship, labour market and taxes.

Risk for a major slow down in German GDP growth

Germany – the largest economy of the region – is expected to reach a GDP growth of 1.1 per cent next year and 1.5 per cent in 2013, which is a major slowdown compared to 2.9 per cent this year. Labour market reforms have so far paid off. Structural policy is now focused on bank recapitalisation and consolidation.

Estonia shows the highest growth rate in the region, followed by Lithuania. The recovery in the Baltic countries is expected to continue, reaching growth rates of 3-4 per cent per year. Although these countries are export dependent, earlier imbalances have been reduced and the resilience against global turmoil is greater. A slowdown will nevertheless complicate the reform process – in Latvia and Lithuania the goals are to reduce the budget deficit and inflation, and to enter EMU in 2014.

The Nordic countries at the high end of the Baltic Sea index

Macroeconomic imbalances in Poland have increased in recent years, as suggested by higher inflation rates, and deficits in the fiscal and current accounts. Remedial policy action is reducing these imbalances, while economic growth is expected at respectable rates of 3-4 per cent. Poland is not in a hurry to enter the EMU, but instead waits for the euro crisis to be resolved, and thus allows the fulfillment of the Maastricht criteria to take its time.

GDP growth in Russia and Ukraine are expected to barely exceed 4 per cent, and the dependence on high commodity prices is considerable. Reforms are pushed forward, and the vulnerability to global commodity markets is significant. The urgent need for reforms is reflected in the Baltic Sea index, which ranks the two economies at the bottom in the region.

The Nordic countries are found at the high end of the Baltic Sea index with strong business climate. Also the economic outlook is relatively positive. Following a slowdown next year, GDP is expected to grow by about 2 per cent in 2013. Real economic growth in Sweden is forecast at 1.1 per cent in 2012 and at 2.2 percent in 2013. Should the fall in external demand deepen, the vulnerability of the business cycle and real estate developments are aggravated by the elevated household debt ratios.